Is Raser Technologies a Bargain, Or Just Cheap?

Raser Technologies (NYSE:RZ) stock has fallen almost 50% since the company announced an offering of shares on June 30. Although the round quickly filled, the stock continued falling, and it seems like a screaming deal. Is it?

On July 7, Raser Technologies sold $25.5M of stock and warrants in a secondary offering. According to press reports, this amounted to 13% of Raser's stock, thereby valuing the company at (very approximately) $200M, or $175M pre-money.

The units, each consisting of 1 share and 1/2 a warrant exercisable at $4.62 was offered at $2.98. Depending on how you value the warrants, this means that the institutional investors who purchased the shares valued the stock at between $2.50 and $2.75 per share, which was approximately what the company's shares were trading at the day the offering closed.

Low Temperature Geothermal Development

Raser's model is to focus on previously known, relatively low temperature geothermal resources which had previously been passed over because they had historically been too cool to develop for electric power. As I discussed in my overview of Geothermal Power, exploration risks have historically prevented much geothermal power production. By using known geothermal resources, Raser completely avoids the risk and expense involved in exploration.

There is also little technology risk, since the modular PureCycle turbines produced by United Technologies Corp. (UTX) are only slightly modified (by UTC) from a decades old production chiller from the same company. Assembly-line manufacture of the turbines also speeds deployment. The twelve to 18 months within which they expect to be able to develop projects is half that of the industry standard 2-3 years.

Raser is currently in negotiation with lenders in order to obtain financing for its 300MW geothermal development pipeline. In order to obtain that financing, lenders want to know that Raser will remain in business in order to build and operate the proposed plants. The additional cash from the secondary offering will go a long way towards alleviating that concern.

Raser is also pursuing a Department of energy loan guarantee, as well as stimulus funding under the ARRA. With Raser's Thermo plant now in New Mexico selling power to the city of Anaheim since 2008, utilities now seem to believe that Raser can deliver on its promises. Some evidence of this came in the form of a (non-binding) term sheet with the Southern California Public Power Authority [SCPPA] for 110 MW of geothermal that envisions part of the purchase price paid up-front, in effect, having SCPPA finance part of the plant construction.

If any of these multiple avenues for project finance are finalized, I expect the stock price to receive a big boost from the currently depressed levels.

The 100 MPG Hummer

If turning the business model for geothermal development on its head is not enough, Raser is also working on hybrid vehicles. They've put together a range extended electric drive train for large vehicles, which they chose to showcase in a Hummer H3. Like Trinity AFS, they choose to grab headlines by ignoring the electricity used to charge the vehicle, and emphasize the relatively meaningless MPG number. I'm not sure if much of this technology is unique; large vehicles like the Hummer are especially well suited for dual mode EV conversions because the frame is capable of carrying the extra weight of batteries without an extensive redesign.

I personally would be happiest if Raser divested their Transportation and Industrial segment, in which they are pursuing the hybrid technology. There seems to be little obvious synergy between the two segments, and they don't seem to have an outstanding technology or business model. Furthermore, they face significant competition, not only from incumbent car and heavy duty vehicle manufacturers, but also from countless startups, such as Trinity.

I know of two other pure-play publicly traded companies in the large electric vehicle space: Balqon Corporation (BLQN.OB), and UQM Technologies (UQM), and where there are two public companies, there are bound to be several private ones. A third public company, Odyne, went bankrupt last year and sold its assets to Dueco, which is now a competitor in the hybrid heavy equipment market. I would prefer if management were to focus on geothermal, where their business model is relatively unique in the industry and the main competition is with increasingly expensive fossil fueled electricity generation.

However, while management denies any intent to shed the transport arm in interviews, they seem to be doing the next best thing: Devoting most of their resources to geothermal. According to the last annual report, assets in the Transport and Industrial segment fell from almost $1M in 2006 to $750,000 in 2008; they have "reduced our resources committed to new developmental efforts" in this segment. Meanwhile, assets in the Power Systems (geothermal) segment grew from approximately $6M in 2006 to $168M in 2008.

Too Cheap to Ignore

Raser's future success will be highly dependent on their ability to raise project financing for their very ambitious development plans. In the current environment, raising such financing is far from certain. They will need to raise significant amounts of money for project finance, and successfully develop those projects if they are ever to reach profitability. If they fail, the stock price will continue to fall.

With such large uncertainties, it is difficult to value the company, so my inclination is to rely on the implied valuation from the recent offering, of between $2.50 and $2.75 a share. These large investors would only have invested if they felt they were getting in at a discount to the value of the business, and so I am comfortable buying at slightly over $2.00, giving me a comfortable discount to the offering.

At these beaten-down prices, any good news should cause a sharp spike in the stock price in very short order.

End Notes 7/23/09

I wrote this article over the weekend, and have since then tripled my position, at prices between $2.00 and $2.05. I also bought some January 2011 $5 calls. This morning, Raser announced the restructuring of an existing line of credit, not something I would consider major news, but it's a step along the way to advancing the projects in their pipeline. The stock seems to be starting to rebound on the news.

DISCLOSURE: Tom Konrad and/or his clients own RZ and UTX.

Comments

[john s. gordon:]

jerry -
bottoming cycles (e.g., butane boiler-turbine-condenser) have been considered since 1974 but have never gained traction in the market. electric utility companies seem to like to continue doing the same old.
> jack

Jul 24 08:56 AM

[Tim Plaehn:]

Razor has been an interesting story, but do they ever plan to generate any profits? The company continues to seem more like a money hole than an investment.

Jul 24 09:10 AM

[Tucsonbill:]

Tom, I thought the Beaver, Ut plant was the source of power for Anaheim, Ca.----Tucsonbill

Jul 24 11:41 AM

[Tom Konrad:]

Barrell-
Rasor's advantage is exactly that: first mover advantage on low temperature geothermal leases. There are only so many known resources. If Rasor manages to prove their model, others will start to compete, but Raser will then have a large number of MW of plants producing power, generating income to shareholders even if they never build another plant.

Also, don't udnerestimate the value of the orgnizational knowledge needed to get a plant operating in the field.


On Jul 24 07:25 AM A Barrel Full wrote:

> I have asked a similar question before about Raser. I love the business
> model, and they have the advantage of jumping the gun, so to speak.
> However, longer term there is nothing to stop anyone else copying
> what they do. Buy the technology from UTC and deploy. What is their
> USP? Is it just down to the fact that they have a good lot of assets
> already in the bag?

Jul 24 12:24 PM

[Tom Konrad:]

TucsonBill-

The "Thermo" plant, the "Hatch" plant, and the one in Beaver County are all the same thing.
renewableenergydev.com.../


On Jul 24 11:41 AM Tucsonbill wrote:

> Tom, I thought the Beaver, Ut plant was the source of power for Anaheim,
> Ca.----Tucsonbill

Jul 24 12:28 PM

[alphaMS:]

While you say utilities seem to believe raser can deliver on their promises--I doubt that is the case. Their goal was to have 3 plants running in 2008 and 109 MW in place for 2009. They have fallen woefully short of their promises. They have not been delivering power to Anaheim, as you say, since 2008. It was sometime in the second quarter of 2009 and they are at best delivering 5MW on a 10MW contract. They are not delivering per the terms of the Anaheim PPA.
The costs associated with the first plant are double or triple their estimated costs. It remains to be seen if they can even deliver a plant that can produce to spec. I am extremely skeptical about this company. Early in the year, their press releases claimed they were a leader in geothermal power production--that was hardly the case then and it is not the case now

Jul 24 12:29 PM

[Tom Konrad:]

Raser is not missing low temperature Rankine cycles... the PureCycle turbines they are using are precisely that: low temp Rankine units. At higher temperature resources, they even use them in series, as you suggest for coal plants, etc. They also talk about heat recovery, www.rasertech.com/heat... although they do not yet have any projects.


On Jul 24 08:36 AM jerrydd wrote:

>
> Razor and others are missing the killer app for this low temp Rankine
> tech which is widely known but not deployed.
> The big market is almost every powerplant including nukes these should
> be inserted between the steam turbine and the condenser raising every
> one's eff by 5-10% and cut fuel needs by 10-20%.
> Not only does it increase output, eff but also cooling water, condenser
> costs.
> By installing these we could cut coal use by 40% with conservation,
> eff, retro fitting buildings we could cut out the rest of coal use
> and it's huge costs now not in the price of coal but will be soon.
>
> . Smaller versions on ships, trains even smaller ones as CSP units
> for homes, small businesses is other big apps.

Jul 24 12:32 PM

[Tom Konrad:]

Alpha,
The question is not how badly RZ has performed in the past... that's why it's so cheap today... the question is, will they manage to exceed investors currently very low expectations.

BTW, what's your deal? I see you've left 18 comments on Seeking Alpha, all on articles about Raser, and all negative. If you're a short, congrats on your large profits... I'd take them ASAP.


On Jul 24 12:29 PM alphaMS wrote:

> While you say utilities seem to believe raser can deliver on their
> promises--I doubt that is the case. Their goal was to have 3 plants
> running in 2008 and 109 MW in place for 2009. They have fallen woefully
> short of their promises. They have not been delivering power to Anaheim,
> as you say, since 2008. It was sometime in the second quarter of
> 2009 and they are at best delivering 5MW on a 10MW contract. They
> are not delivering per the terms of the Anaheim PPA.
> The costs associated with the first plant are double or triple their
> estimated costs. It remains to be seen if they can even deliver a
> plant that can produce to spec. I am extremely skeptical about this
> company. Early in the year, their press releases claimed they were
> a leader in geothermal power production--that was hardly the case
> then and it is not the case now

Jul 24 12:40 PM

[Jason Hamlin:]

Nice call out of Alpha, Tom. All negative comments and all about the same company seems a bit odd. The person is obviously trying to create negative sentiment towards Raser.

How do you think Nevada Geothermal (HTM) compares to Raser? Do you like one better than the other and why?

Thanks,
Jason

Jul 24 02:51 PM

[Tom Konrad:]

Jason,
I decided to check Alpha out because he seemed amazingly well informed for someone who had left so few comments; he clearly follows Raser even more closely than I do.

Regarding Nevada Geo, I consider them different types of plays. Nevada, as a traditional developer with a large project near production is probably a little less risky. RZ has a larger chance of failing to deliver on promises, as Alpha pointed out (I don't think he's necessarily wrong, just that he may have ulterior motives), but at current depressed prices, Raser also has a great chance of being a 3-5 bagger in less than a year, so I'm willing to take the risk of it going to zero.

I'd rather own some of both Nevada Geo and Raser (as I do, in about equal amounts) than have the same amount invested in just one. But if I had to choose one today, I'd by Raser.


On Jul 24 02:51 PM Jason Hamlin wrote:

> Nice call out of Alpha, Tom. All negative comments and all about
> the same company seems a bit odd. The person is obviously trying
> to create negative sentiment towards Raser.
>
> How do you think Nevada Geothermal (seekingalpha.com/symbo...)
> compares to Raser? Do you like one better than the other and why?
>
>
> Thanks,
> Jason

Jul 24 06:59 PM

[alphaMS:]

Tom
I have the benefit of responding after your second post. I am not sure why you are questioning “what my deal is” or throwing out the “ulterior motive” stigma.

Prior to your article, my responses were to 2-3 other writers who posted inaccurate information. I should not have to defend my position why I correct inaccurate information. My posts are negative because I have been negative on the company.
I have questioned their ability to do what they say, I have questioned their ethics, and I have questioned their overzealous ridiculous projections.
I have been correct when challenging the accuracy of prior articles and I have been right about the company. It would not make sense for me to throw out a positive comment when I think the company is full of hooey.
I became aware of this company shortly after their reverse merger. I read the filings. This thing was boxed up with only 2 million shares free trading, with something like 42 million issued and outstanding at the time. We all know what that means. While I have taken short positions in the company, I certainly knew better than to stand in front of that train at that time. The stock ran from apx $1.25 to $40 and back down.
When you spot a stock that is being manipulated it is good to keep an eye on it. When a stock is boxed up, at some point in time it collapses.

As you say this is all in the past. In my mind it paints a negative picture on the company. Especially when it is combined with grandiose projections, fluffy PRs, and ridiculous claims of being a leader in geothermal production.

This stock may run a point or two. If it does I’ll be ready to whack it—just as you will be ready to sell and take profits. Just as the company has missed their projections every year since their inception, they will miss in 2010. In my opinion. For what it is worth—at $2.00/share I would be taking a position on the long side if I had to take a position. That said, I still have a few calls I have sold—but I am very comfortable holding them.


On Jul 24 12:40 PM Tom Konrad wrote:

> Alpha,
> The question is not how badly RZ has performed in the past... that's
> why it's so cheap today... the question is, will they manage to exceed
> investors currently very low expectations.
>
> BTW, what's your deal? I see you've left 18 comments on Seeking
> Alpha, all on articles about Raser, and all negative. If you're
> a short, congrats on your large profits... I'd take them ASAP.<br/>

Jul 25 10:53 AM

[alphaMS:]

Nice call out? What does that mean? With all my comments being negative--was there some doubt as to my position on the company.
Was there anything specific that I wrote you want to comment on--or did you just want to take a pot shot at me personally, and drive on?


On Jul 24 02:51 PM Jason Hamlin wrote:

> Nice call out of Alpha, Tom. All negative comments and all about
> the same company seems a bit odd. The person is obviously trying
> to create negative sentiment towards Raser.
>
> How do you think Nevada Geothermal (seekingalpha.com/symbo...)
> compares to Raser? Do you like one better than the other and why?
>
>
> Thanks,
> Jason

Jul 25 10:57 AM

[Micheal Ellis:]

Love the business model...fact is first to market will assist in maintaining leadership position as other seek to compete. Moreover, geathermal provides for political and environment benefits for clean energy.
As for the automotive applications which Raser provides, I totally agree with your comments. The focus should be on the geothermal side of their business. Speculation on the auto side takes away the focus of not only management but also shareholders.

Thanks for your comments and focused report.

ME

Jul 25 11:49 AM

[Tom Konrad:]

Alpha,
There's nothing wrong with being negative on a stock, or a company, but such information is more credible when the motivation is clear. Few investors follow just one company, especially one they don't like. It's not your comments on Raser than seem strange, but that you've never commented on anything else.

Nevertheless, you're obviously well informed about Raser. If you would like to put your thoughts on the company into an article, I'd be interested in publishing it on AltEnergyStocks.com. You could maintain anonymity if you like. My email address is available on my bio.

Jul 26 11:56 PM

[Rober lordis:]

I think Raser is the real deal. They are already powering Disneyland with the plant in southern Utah. Plus they are in the good graces of the president and governor of California, Both of them are huge supporters of what the company is doing.
Trying to single them out as a failure during this economic down turn is unfair and seems like you have an agenda against the company.
Pull your head out of your @$$ and KNOW that RASER and companies like it WILL SAVE THE PLANET if little pricks like you don't stand in the way.

All the best to you and yours
Rober L.
[e-mail]
All comments welcome

Jul 30 05:22 PM

[Ret'd Chemist:]

Have been following Raser for about two years. Have dumped them twice after their business finesse in selling stocks knocked the hell out of their marfket price., but for some reason I keep going back for another beating. As best I could figure it, their stock price was about 4 when word got out about their stock sale coup, at which point it dropped down to about 2 1/2. A bunch of folks with the red @$$ then dumped it down to below 2 - and I was almost among them but instead I bought more. I wish that some of those engineers would plan their financial needs a lot further ahead of time and then get their rears back out into the field/plant/lab or whatever, leaving the business to people with more financial smarts.
As regards their low inertia start up motor, I always thought that it had implications in their geothermal generation process. But what the hell do I know, I'm just a chemist.
Regarding the obviousness of their process and the equipment they use, I beleive that their will be so many unobvious twists, turns and tripping hazards that a good patent attorney could keep the competition at bay for years with tricks learned from implementing the obvious. Although a lot of people think these are just trade secrets, a good attorney backed up with a good engineer/chemist/physi... can spot the patentable ones. Everybody else does it.
Anyway, I wish them luck and honestly believe that they will go to 5 before they go to 0(if they do at all).

Aug 01 03:56 PM

[wind4me:]

how do you figure out a elec battery car company and a Geothermal who is poorly capitalized to drill for more expansion???? Ever since (RZ) did that financing snafu, I have watched but have not had the courage (or stupidity) to buy.......

NGLPF.ob seems to have a better path to profits but that extra 10 million they are going to have to spend to keep the plant at 40mw's is not what I was looking for!

Aug 02 06:36 PM

[peacemaker:]

Has anyone ever thought about combining the binary turbine system and marrying it to a coal and or gas fired plant ??

One could recycle the heat from burning coal and gas in current electrical plants and using the waste heat to turn binary electric generators. Weather the heat comes from the earth or from the ground , either should work in a binary system. I am sure the waste heat is above the 400 F mark and is suitable for the binary
heat exchanger. Not green as geothermal, but RZ could put in their plug in modules until all the coal and gas plants could be replaced and each utility would gain extra efficiencies from this marriage of geothermal systems to coal and gas fired plants today which would help reduce carbon foot prints in these older style plants.

Aug 03 05:13 PM

[H.J. Huneycutt:]

Good article, Tom. I share a lot of the concerns echoed in the comments about RZ, but I also like the upside potential very much and have believed for awhile that the shorters were wrong about this company. Thus far, I'm disappointed by the fact that there seems to be little to prove the shorters wrong.

I went long on RZ around $3.30. Not sure if I'm confident enough to double down. I think I might prefer to make safer plays on REITs and natural gas-related companies that are also severely beaten down. Then again, maybe I'll take another chance on RZ.

More than anything, I'd just like to see some evidence that Raser could turn a profit. I don't necessarily mean they have to have positive EPS immediately --- just that I'd like to see a revenue stream and a cost stream that would suggest that given improvements in efficiency and their business model, they could forseeably produce a profit sometime within the next 3 years. I'm not seeing that yet.

Sep 02 11:30 AM

[Tom Konrad:]

With the DOE loan gaurantee denied, I decided to cut my losses; see article- bit.ly/13S6ha

Sep 03 02:43 AM